Based on the microscopic data of industrial enterprises in China from 1998 to 2013, considering the interaction between enterprises and the influence of entry and exit of enterprises, this paper decomposes the productivity changes. We take the resource allocation among enterprises into the agglomeration effect, and take the entry and exit into the selection effect to comprehensively analyze the advantages of agglomeration. It is found that China’s urban manufacturing agglomeration has both static and dynamic advantages. The decomposition of productivity changes shows that the productivity improvement of China’s manufacturing industry mainly comes from agglomeration effect, in which the contribution of enterprises’ progress is the highest. With the improvement of agglomeration level, the role of resource allocation becomes more and more important. With the improvement of agglomeration level, the contribution of selection effect is also increasing, and the contribution of enterprise exit effect is increased from 2.86% to 12.82%. The empirical research results show that manufacturing agglomeration has the greatest influence on resource allocation of agglomeration effect. At present, China’s manufacturing agglomeration is at a low level, but it is on the rise. Therefore, the optimization of resource allocation and the exit of inefficient enterprises in the competition will be the key to the improvement of China’s manufacturing productivity in the future.